Dow's 936-Point Surge Ends Losing Streak

By

Peter A. McKay

Updated Oct. 13, 2008 7:38 p.m. ET

Stocks snapped a brutal losing streak in resounding fashion as the Dow Jones Industrial Average enjoyed its biggest one-day point gain ever following new moves by governments to shore up the global financial system.

The Dow leapt 936.42 points, or 11.1%, to 9387.61. The rally ended an eight-day slide in which the blue-chip measure plummeted almost 2,400 points and endured the worst full-week performance in its 112-year history.

Regulators have been scrambling to shore up financial institutions and ease some of the fears that have led to a freeze-up in the credit markets. Analysts hope the latest steps may have put the worst of the crisis in the rearview mirror, although some cautioned that economic weakness and skittish lending practices could persist. The Dow is still down 29% for the year to date and 34% from its record close of 14164.53 hit on October 9, 2007.

"I have to admit, they have come up with something that makes sense," said trader Don Bright, who was skeptical of Washington's initial efforts to bail out the U.S. financial industry. Referring to the increasingly global approach that's emerging among policy makers, he said: "We have to do it this way. We couldn't do it without our friends, no matter how all-powerful we'd like to think America is economically."

After running from risk last week amid frozen credit markets and concern that more companies could be pushed into insolvency because of a lack of access to funding, investors Monday cheered pledges of further coordinated actions by global authorities to recapitalize the crippled banking system.

Bright Monday

Traders work on the floor of the New York Stock Exchange Monday. Michael Nagle for The Wall Street Journal

Leaders of the 15 eurozone countries agreed to a plan that will guarantee loans between banks through 2009 and allow governments to buy stock in distressed financial companies. Australia guaranteed wholesale funding for banks. Britain said it would inject as much as $63 billion into three banks; Germany made its own announcement of a $107 billion recapitalization plan. The ECB, the Bank of England and the Swiss National Bank announced they would lend unlimited amounts of dollars to banks.

Some indicators suggested the funding markets were less strained. According to the British Bankers' Association, three-month U.S. dollar Libor dropped to 4.7525% from Friday's fixing of 4.81875%. Meanwhile, the one-month rate fell to 4.56% from 4.5875%. There was no fixing in the overnight rate on account of the Columbus Day holiday in the U.S.

"The freeze is starting to thaw," said Lena Komileva, head of G7 market economics at Tullett Prebon.

The latest policy moves jolted stock markets around the world. European indexes jumped. Asian indexes also rose; Hong Kong's benchmark index surged 10.2%. Those gains set an upbeat tone for the U.S. market prior to the opening bell in New York.

The S&P 500 soared 12% to 1003.35. All its sectors climbed, led by energy,XLE-2.19% up 18.1%. Five other S&P categories posted daily gains of at least 10%, while the financialsXLF-0.32% were up 6.4%. The technology-focused Nasdaq Composite Index rose 12% to 1844.25. The small-stock Russell 2000 jumped 9.2% to 570.55.

Despite Monday's feverish rally, many Wall Street veterans remain on the lookout for a grinding period of weakness in the global economy and stocks in the months ahead.

"The danger here is that people will be lulled into the idea that a strong bull trend is now in place rather than the idea that the market is just bouncing off a short-term oversold condition," said Michael Darda, chief economist at MKM Partners, a trading and research firm in Greenwich, Con.

In a note to clients Monday, Mr. Darda cautioned that spreads between high-yield corporate debt and Treasury bonds suggest that the U.S. economy is due to remain weak for the next two years or so, with the unemployment rate likely to peak around 8%, compared to the latest reading of 6.1% for September.

"In many respects, I'm not sure if our economy has prepared itself for 8% unemployment," said Mr. Darda. "You have a lot of households that have a lot of debt both from mortgages and credit cards. They have to de-lever [or reduce debt levels] just as we've been seeing corporations doing" by selling assets to raise cash.

Mr. Bright, a partner at the Chicago-based propietary firm Bright Trading, was on the road at a trading seminar in Ft. Lauderdale. He went back to his hotel room to trade on his laptop as the market gyrated, selling into rallies before buying back whenever the market would experience brief dips. That approach was meant to reflect his belief that while the market would stay volatile, with an upswing apparently in the cards for the day, the conditions weren't ripe for a more lasting run-up over weeks or months.

As the last hour of the session approached, Mr. Bright noticed that the downticks on the S&P 500 were getting smaller, narrowing to two- or three-point pullbacks each time rather than six or seven points. "At that point, we were no longer having a true two-way market," he said. "I bailed out and went flat because it looked like the thing was getting ready to run away."

Indeed the market did just that, with the S&P and Dow each gaining nearly 4% in the last hour of trading alone. But Mr. Bright says he has no regrets about missing the opportunity to play the extraordinary last hour of Monday's session more aggressively.

"We always take the approach of taking small chunks [of profit] at a time, and that's especially what you have to do when the market is moving like this, with the potential to get away from you at any moment, " he said.

Some traders were hesitant to read too much into the stock market's move in light of the closing of the Treasury market on Monday due to the Columbus Day holiday. "What we've really been looking at the last few weeks is a credit event, and we're not getting all the signals today that we would normally see from the credit markets," said one trader.

Among stocks to watch, Morgan StanleyMS-1.17% was able to close a $9 billion deal that will give Mitsubishi UFJ Financial GroupMTU1.38% a 21% stake, despite the investment bank's stock having dropped 61% from where it had closed before the deal was announced. Morgan Stanley shares soared almost 87% on the news. Mitsubishi shares gained 15.5%.

Crude oil futures jumped $3.49, or 4.5%, to end at $81.19 a barrel in New York, boosted by an uptick in speculative activity as traders found it easier to borrow money and grew less antsy about trading crude purely as a financial bet. But the long-term demand outlook remains weak. Other commodities rallied strongly. The broad Dow Jones-AIG Commodity Index was up 2.7%.

The dollar was mixed against major foreign rivals. The euro cost $1.3583, up from $1.3413 late Friday. One dollar bought 101.78 Japanese yen, up from 100.25 yen.

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